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M&M: Auto and farm segments deliver

Jun 1, 2011

M&M announced the fourth quarter results of financial year 2010-2011 (4QFY11). The company has reported a growth of 28% and 6% in sales and net profits respectively on a standalone basis. Here is our analysis of the results.

Performance summary

Standalone revenues rise by 26% YoY during FY11 led by growth in both the segments - automotive and farm equipment.

Operating profits rise at a slower pace (as compared to sales) as operating margins contract by 1.2% YoY to 14.7%. Margin contraction is on account of higher raw material costs (as a percentage of sales).

Net profits increase by 28% YoY led by higher other income and interest income (as against an expense in FY10).

Consolidated total income (gross revenues and other operating income) and profits rise by 18% YoY and 24% YoY respectively during the year.

Standalone financial performance

(Rs m)

4QFY10

4QFY11

Change

FY10

FY11

Change

Sales

53,046

67,782

27.8%

186,021

234,937

26.3%

Expenditure

44,591

59,163

32.7%

156,469

200,375

28.1%

Operating profit (EBDITA)

8,456

8,619

1.9%

29,552

34,562

17.0%

Operating profit margin (%)

15.9%

12.7%

15.9%

14.7%

Other income

181

474

161.6%

1,994

3,095

55.3%

Interest (net)

9

(158)

278

(503)

Depreciation

947

1,171

23.6%

3,708

4,139

11.6%

Exceptional items

-

-

908

1,175

29.5%

Profit before tax

7,681

8,080

5.2%

28,468

35,196

23.6%

Tax

1,978

2,015

1.9%

7,590

8,575

13.0%

Profit after tax/(loss)

5,703

6,065

6.4%

20,878

26,621

27.5%

Net profit margin (%)

10.8%

8.9%

11.2%

11.3%

No. of shares (m)

565.9

587.2

Diluted earnings per share (Rs)*

45.3

P/E ratio (x)*

15.0

(*On a trailing 12-month basis; adjusted for extraordinary items)

What has driven performance in FY11?

Mahindra and Mahindra (M&M) reported an impressive standalone revenue growth of 26% YoY during the year. Both the company segments - automotive and farm equipment reported strong growth during the year. Sales volumes in the company's 'automotive' division stood at about 230,110 vehicles during the year, and managed to retain its leadership with a market share of 61% (UV segment). Other product segments such as the small load carriage segment (particularly 'Maxximo') and three wheelers (growing faster than the industry) did well too. It is reported that three-wheeler and mini four-wheeler sales grew by 33% YoY. The company also saw a strong rise in exports during the year. M&M exported 17,138 vehicles (as against 10,567 vehicles last year) to regions such as SAARC, South Africa & South America, amongst others.

Growing revenues by 24% YoY, M&M's 'farm equipment' contributed to about 42% of the company's topline (43% last year) during the year. Growth was largely led by higher volumes which stood at 214,325 units as compared to 175,196 units (22% YoY increase) last year. Within this, domestic tractor volumes grew by about 22% YoY. Exports, however, did better as they grew by 34% YoY to 11,812 tractors as compared to 8,837 tractors last year.

Segmental break-up...

(Rs m)

4QFY10

4QFY11

Change

FY10

FY11

Change

Automotive revenues

31,139

39,598

27.2%

106,152

136,351

28.4%

PBIT

4,065

4,182

2.9%

13,388

17,167

28.2%

PBIT margin (%)

13.1%

10.6%

12.6%

12.6%

Farm Equipment revenues

21,763

27,997

28.6%

79,351

97,968

23.5%

PBIT

4,358

4,756

9.1%

15,009

17,083

13.8%

PBIT margin (%)

20.0%

17.0%

18.9%

17.4%

Others

201

289

43.8%

841

983

17.0%

Total revenues

53,103

67,883

27.8%

186,344

235,302

26.3%

*Excluding intersegment revenues

Like its peers in the auto industry, M&M faced pressure at the operating level as its margins contracted by 1.2% YoY to 14.7% during FY11. The main culprit was raw material costs as they increased by 32% YoY and stood at 69% of sales (as compared to 66% last year). Any further decline in operating margins was, however, arrested as the company was able to keep its employee costs and other expenditure under control.

Cost break up

(Rs m)

4QFY10

4QFY11

Change

FY10

FY11

Change

Raw material

35,845

47,883

-25.1%

123,329

162,639

31.9%

% of net sales

67.6%

70.6%

66.3%

69.2%

Employee cost

2,661

4,261

60.1%

11,985

14,456

20.6%

% of net sales

5.0%

6.3%

6.4%

6.2%

Other expenses

6,084

7,020

15.4%

21,155

23,280

10.0%

% of net sales

11.5%

10.4%

11.4%

9.9%

M&M's profits rose by 28% YoY during the year and were much higher than the 17% YoY growth in operating profits. This was largely on account of higher other income and interest income earned during the year (as opposed to interest expense during FY10).

What to expect?

At the current price of Rs 679, the stock is trading at a multiple of 15 times its trailing 12-month standalone earnings. M&M's management has indicated that going forward commodity prices will play a key role in determining profitability for both the industries - auto and farm equipment. This would be the case for the sector as a whole. Within that, a key factor would be the pricing power each player commands in each segment. Further, considering that interest rates have risen significantly in recent times, demand through vehicle financing could be an issue going forward. The management added that rising interest rates have not been an issue till now. But going forward, it could dampen the growth. Thus, M&M intends to counter the same by focusing on new launches both in the automotive and farm equipment sector as well as managing capacities.

As for the overall industry growth for the next year (FY12), it is estimated at about 11% to 13% for the tractor industry and about 15% to 18% for the auto industry as a whole.

M&M's performance during the FY11 period has been a bit above our estimates and we will have to upgrade our numbers accordingly.

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